What is a mortgage loan?

A mortgage loan is a loan extended by a lender on the basis of a property owned by the borrower and pledged to the lender. Ownership and the right of use of a mortgaged property remains with the borrower, but he does not have the right to sell the property as long as the mortgage loan account is not closed.


What is conventional mortgage?

It is a mortgage that does not have any backing by insurance or guarantee by the US federal government.


What is 'first mortgage'?

First mortgage the primary lien against the mortgaged property. This means that in the event of default, the first mortgage has first claim.


What is 'second mortgage'?

Second mortgage is a mortgage obtained when another mortgage is already in place for a given property. In the event of default, the lender of the second mortgage is paid after the lender of the first mortgage.

What is mortgage refinance ?

Mortgage refinance is mortgage loan that is taken to pay off in full all dues against an earlier mortgage loan. The property that was mortgaged for the earlier loan is released from the earlier lender and is mortgaged to the new lender.


Why should one opt for a mortgage refinance loan?

Different people have different reasons to opt for mortgage refinance. People take mortgage refinance loans for one or more of several purposes, such as: reduce monthly payments, prolonging or reducing the period of repayment to comply with the borrower's changed circumstances, get a lump sum of cash to meet with an immediate need, or simply taking advantage of reduced interest rates in the market.


How would I know if I should take a mortgage refinance loan?

If your economic circumstances have changed for the better or worse since you took your original mortgage loan, you should look at refinance option. If your situation has changed for the better, you might want to get rid of the mortgage burden quicker than you originally planned.

If your situation has deteriorated, you might want refinance to reduce your monthly payments by prolonging the duration of your loan. These are options you can exercise irrespective of the interest rates prevailing in the market, though lower interest rate is a good attraction.

Alternatively, you can simply reduce your monthly payments by taking advantage of lower interest rates if rates are lower now than when you took the original loan.

To know whether mortgage refinance makes sense to you, you should use the online mortgage calculators provided on the websites of mortgage loan lenders or brokers. Three such websites are: www.mortgageloan.com, www.erate.com, and www.bankrate.com.

These calculators will ask you to enter data specific to you and your property, and will show the various refinance options available to you. If any of the options make sense to you, there might be a case for you to opt for mortgage refinance.


What are the factors that decide one's eligibility for mortgage refinance?

These factors include: the applicant's credit profile, debt-to-income ration, the amount of refinance loan sought, type of property (whether one-family or two-family and so on), the number of years you want to retain the property, the percentage points you are willing to pay as a way to lower the monthly payment interest rate (1 point equals = 1% of the loan amount), and so on.


In a mortgage agreement, who is the 'mortgager' and who is the 'mortgagee'?

The mortgager is the party that takes the loan against the mortgaged property. The mortgagee is the party who holds the mortgage, usually the lender of the loan.


What is debt-to-income ratio?

It is a ratio calculated by dividing the loan applicant's gross monthly debt by his or her gross monthly income. Expressed as a percentage, the debt-to-income ration is a critical indicator of an applicant's creditworthiness. It is also known as debt-to-earnings ratio.


What are 'points' in mortgage loan jargon?

Poinys are the money that is sometimes paid by the buyer to the lender at closing in order to reduce the monthly interest rate. One point equals 1% of the mortgage loan amount. They are also known as Discount Points.


What is a credit score?

It is a computer-generated score evaluating the likelihood of a person paying back a loan smoothly. Lenders use this score to help assess a loan applicant's creditworthiness.


What is foreclosure?

Foreclosure is the legal process that empowers the lender to sell a property to recover his dues after the boroower has failed to make the repayments on the agreed terms. Forecolsure is known as Repossession of Property.


How reliable are online mortgage calculators?

Online mortgage calculators on most websites are fairly reliable as far as approximations are concerned. You cannot take the online calculator results as final. The online results should be for your private reference, on the basis of which you should talk to lenders / brokers in your area.

To be safe, you should take online calculator results from three or four websites and compare them. The results should be fairly comparable. If any calculator shows results that way off the results from other calculators, it might mean that the 'wayward' calculator is defective.


How do I go about finding a mortgage refinance loan lender or broker?

It is advisable to talk to an actual lender or broker only after you have got an idea of what is in store for you, from online mortgage calculators.

The websites whose calculators you used will most probably contain lists of lenders/brokers registered in your city. Alternatively, you can request the website itself to arrange a lender or broker to contact you, provided the website provides such a service.


Who should I approach: lenders or brokers?

Our advice is that you approach brokers because they have offers from different lenders. If you contact lenders directly, they will offer you only their loan packages thus restricting your choice.

However, you should be careful about which broker you are finally settling with. Most brokers are honest but, as in any industry, some can be unscrupulous too.


What precautions should one take while dealing with brokers?

First, you don't have to pay any broker anything if your loan application has been turned down or you have not accepted the loan for any reason. You pay him only during the closure of the loan. The payment may vary between 1% to 10% of the loan amount, depending on your credit profile. Better the credit profile, lower is the payment to broker.

Second, you must ensure that the broker is registered with the regulatory authority for mortgage brokers in your state.

Third, the mortgage loan broker you are dealing with should provide you with the name and address of the lender to whom he/she has forwarded your loan package for evaluation within 14-21 days weeks after your complete application has been taken and the real estate appraisal has been performed.

If the loan broker does not do this, it may be because he/she cannot find a lender for you (due to your credit profile or any other reason), or the loan amount you have applied for is more than the property's worth, or the broker might not just be interested in your application. In such a situation, it is best to change your broker even if that calls for a new real estate appraisal.


Is a low interest rate enough reason to opt for mortgage refinance?

No. The advantage of a low interest rate can be offset by other costs, such as: penalty for premature closure of your existing mortgage loan, and upfront fees and charges you have to pay for your refinance loan.

This is why the decision to opt for a mortgage refinance must not be taken on the sole basis of interest rate. You must take into the total cost of the new loan added to the cost of closing your original loan. The total cost of your new mortgage loan is best expressed as annual percentage rate (APR), not interest rate.


What is APR?

APR is abbreviation for ' annual percentage rate'. It is the exact annual cost of a loan including interest rate, upfront payment, closing costs or pre-paid percentage points.

It is a better indicator of the actual repayment outgoings than interest rates. Every lender and broker is required by US federal law to clearly state the APR in the specified column of the loan documentation.


What is a 'Truth-in-Lending Statement'?

'Truth in Lending' is a US federal law that makes it compulsory for lenders to disclose the annual percentage rate (APR) to home buyers shortly after they apply for the loan.

It also makes it mandatory for the lender to fully and unambiguously disclose all terms and conditions. The statement in which the lender provides such details is known as the 'Truth-in-Lending Statement'.


When is mortgage refinance not advisable?

Mortgage refinance is not advisable in certain circumstances, such as: only a few instalments remain to be paid on your existing mortgage loan, you don't intend to retain your property for long, you are not facing any particular financial problem, and so on. You should seek professional advice from a few brokers on this, and compare their advices for consistency.


What are the types of mortgage refinance loans available?

The types of mortgage refinance loans are the same as the types of mortgage loans, since both are basically loans governed by the same set of laws. Broadly, there are four types of mortgage or mortgage refinance loans:

  1. Fixed interest mortgage (FRM) loans: A mortgage loan whose monthly repayments remain constant throughout the duration of the loan.
  2. Adjustable rate mortgage (ARM) loans: These are loans whose interest rates remains fixed for specified number of initial years and is then adjusted every year. For example, a 3/1 ARM means a fixed interest applies for the first three years and then the rate will change every year therafter. Similarly, a 5/1 ARM, in which the rate adjustments will take place after the first half years.
  3. Interest-only mortgage loans: In this type of loan, the borrower pays only the interest on a monthly basis. The principal is recovered by the lender at the end of the loan term from the boroowers assets such as financial securities, pension, life insurance, and so on.
  4. Jumbo loans: These are loans whose amount exceeds GSE guideline limits, which (for 2008) are: $ 417,000 for single family home, $ 533,850 for two family, $ 645,300 for three family, $ 801,950 for four family, and $ 208,500 for second mortgage loan. The GSE guideline for a single family home in a high cost-area is $ 625,500. These figures apply to all the states of the US except Alaska, Hawaii, and Virgin Islands (where the limits are 50% higher than the other states). The figures are subject to be revised every year, in October, though they have not changed since 2006.

Is there a limit to how high the interest rate can go in an adjustable rate mortgage (ARM) loan? Yes, these limits are called 'caps' or 'rate caps'. Caps are pre-specified maximum rises in interest rate or monthly payment whether at adjustment time in an ARM loan or through the entire duration of the loan. ARM loans normaly have both annual and lifetime caps.


What are 'balloon loans'?

It is a category of loan in which the regular monthly repayments have to be followed by a lump sum payment of the total remaining balance. It may be a good choice for those who anticipate cosiderably higher earnings in the future.


What is cash reserve in the context of mortgage or mortgage refinance loans ?

Cash reserve is the amount of money a borrower has to hold in reserve, in addition to the down payment and closing costs of a mortgage or mortgage refinance loan. The lender specifies the cash reserve, though not all lenders insist on it.


Which are the most popular types of mortgage or mortgage refinance loans in the US?

The most popular types are the 15-year and 30-year ARM loans.


What are 'conforming' loans?

Loans that comply with the maximum limits prescribed by GSE are called 'conforming' loans. These limits are: $ 417,000 for single family home, $ 533,850 for two family, $ 645,300 for three family, $ 801,950 for four family, and $ 208,500 for second mortgage loan. The GSE guideline for a single family home in a high cost-area is $ 625,500. These figures apply to all the states of the US except Alaska, Hawaii, and Virgin Islands (where the limits are 50% higher than the other states). The figures are subject to be revised every year, in October, though they have not changed since 2006.


What are 'non-conforming' loans?

These are loans that don't conform to the GSE guidelines. Non-conforming loans are typically priced higher by 0.25% to 0.50% than conforming loans.


What is GSE?

GSE is abbreviation for 'government-sponsored enterprise'. GSEs are a group of companies created by the US Congress to supply low-cost credit to the agriculture, home mortgage, and education sectors. Of these, home mortgage forms a majority portion of loans flowing out of GSEs. There are three groups of mortgage finance GSEs: Fannie Mae, Freddie Mac, and Federal Home Loan Banks.


What are GSE Guidelines?

Guidelines issued by 'government-sponsored enterprises (GSEs) such as Fannie Mae, and Freddie Mac, for amounts of loan disbursable. In 2008, the amounts are $ 417,000 for single family home, $ 533,850 for two family, $ 645,300 for three family, $ 801,950 for four family, and $ 208,500 for second mortgage loan. The GSE guideline for a single family home in a high cost-area is $ 625,500. These figures are applicable to all states except Alaska, Hawaii, and Virgin Islands, where the limits are 50% higher.


What is Fannie Mae, Freddie Mac, and Federal Home Loan Banks?

These are three groups of mortgage finance GSEs. (See 'What is GSE?')


What is 'closing' and what are 'closing costs'?

'Closing' is the legal transfer of ownership of a property from seller to buyer. It is done through a formal across-the-table meeting between the buyer, seller, settlement agent, and the buyer and seller's agents. It is also known as 'settlement'.

'Closing costs' are the costs of transferring ownership of the property from the seller to the buyer. It does not include the purchase price. Closing costs usually conist of fees for obtaining loan, appraisal of the property, survey, real estate agent's commission, taxes, and so on. It normally amounts to 2% to 4% of the purchase price.


What is amortization schedule?

It is a tabulation that shows the breakdown of each monthly repayment amount into: 1) the amount will go towards the principal amount, and 2) the amount that will go towards interest payment.


What is prepayment penalty?

It is a penatlty charged to a borower if he fully repays a debt before the due date.